“Best of Gulf Oil and Shipping” Bulletin Board Elite

Here we have another one from Greg “Gunner” Guenthner and his Bulletin Board Elite service … the email actually went out for the first time a few months ago, but the stock hasn’t really moved much since, so perhaps it’s worth a look.

So, I guess we’ll have to judge this one on its own merits — always a good idea.

This is again a “Company X” teaser, though of course it’s much different than the last “Company X” teaser I wrote about (that was the abysmal Clearwire). Company X in this case is a firm that operates Gulf Coast shipyards and builds and repairs ships and other vessels. Sexy, huh?

So, what do we learn about this little “company x”?

It is “at heart, a small family company that builds and repairs steel and aluminum marine vessels.”

They make “modular components of offshore drilling rigs” and various other oil service vessels.

The company is split into two separate segments, both of which are profitable: construction of vessels, and repair and conversions of same.

“While the shipbuilding side of the business operates on land at the company’s facilities, the repair business is mobile. Most repairs are made on floating dry docks or the ships themselves.”

“Gunner” says that the stock remains “virtually undiscovered”, has an “extemely low” price to earnings ratio, and trades for less than annual sales. In his words, “it’s still trading at dead sea prices as the new Gulf boom is beginning to take shape.”

So … into the hopper it all goes. The Mighty Thinkolator churns and churns. Coughs. Sputters.

And answers,

this is, in all likelihood, Conrad Industries (CNRD on the pink sheets)

Actually, this one piques my interest a little.

Conrad industries is indeed a family-founded company, lightly traded, that runs shipyards in Louisiana and Texas, and provides all the repair and conversion services as teased.

The PE is very low, if we go on 2007 results — the earnings were 2.63 per share, and the share price is currently a hair over $12. So that’s a trailing PE of about 4.5. The market cap is about $88 million, and they recently authorized a share repurchase plan of $10 million, so that might serve as a bit of a backstop to the share price.

The shares have certainly fallen this year, though — they also looked cheap in late December when this teaser first circulated, at around $15, but that didn’t stop the shares from falling a further 20% … so I have no idea whether this is it for the haircut or not. The shares did spike as high as $18 last last fall.

This is a thinly traded pink sheet stock, but — and this is unusual for these little guys — there is one very successful mutual fund that holds a significant position in their shares (Pinnacle Value). They were selling shares as of the last data release, but it’s still their second largest equity holding.

Conrad has had an amazing couple years — 2006 and 2007 were both huge winners, so a look at the chart will make you wish, wistfully, for a time machine back to early 2006, when the shares were going for less than two bucks. Revenue grew by about 38% in 2007, and net income was up by about 200%.

Why is that? I haven’t looked at all the details, but they have had some big acquisitions (relative to their size), and I assume that their business is very cyclical with changing investment in the Gulf’s energy infrastructure. I don’t know were we are in the energy investment cycle in the Gulf of Mexico, though certainly there’s more deep water exploration going on, along with lots of shallow water production … and I imagine the natural gas producers are chomping at the bit to speed up production at these prices. There are also probably still lots of 20 and 30 year old ships and jackup rigs still working down there that must need lots of repairs, but that’s just a guess. Their business last year was about half energy-related (the other half being split between government projects, including ferries, and other commercial work), but their backlog, though large at about $100 million, is apparently only 4% energy related. I’m not sure what to think about that.

Just to reinforce the cyclicality: take the chart back a few more years, and you’ll see that Conrad has traded in the area of $12 before … but it was about ten years ago.

So … is Conrad Industries worth your time? Only you can make that call — I’m intrigued by the nice low valuation and the growing backlog and potential earnings growth, and I like the buyback, especially because it’s accompanied by relatively low long term debt levels (though be careful, they do incur other liabilities for big projects that require a line of credit that might become more expensive or difficult to get in this environment, even if they don’t ever tap the debt).

In addition to the buyback, they’re also investing a lot of their cash flow in new equipment — some of these cranes and related tools are multi-million-dollar items, so they are tying up a lot of capital … the assumption is that their cash flow can keep up with their capital needs, but it would probably be worth your time to actually read and understand their filings if you’re interested … there aren’t many analysts or experts following this one to help you decide what the risks are.

What I particularly don’t know much about is the level of competition, and the strength of their pricing in different environments — I assume that in those dark years five years ago when the share price hovered around a dollar that they weren’t making any money, but I don’t know why. If business slacks of by a few percentage points, are there competitors that are going to compete and drive profits to zero? Probably also worth a thought.

So … an interesting one, even though it’s not new. If you’ve got a feeling … or even better, a fact … about Conrad Industries, please feel free to share. Here’s a little excerpt from their last earnings report to get you started:

“Throughout the sixty years the Company has been in existence we have endured many business cycles and there
have been numerous ups and downs in volume of business and profitability. The Company has continuously
reinvested its earnings in expanding capacity, maintaining the shipyards in excellent condition and upgrading
equipment and facilities to improve working conditions and efficiencies. Throughout these business and economic
cycles we’ve had to evolve and change with the demand of our customers and expand our geographical area and
product mix in order to survive and prosper.

“Currently, we believe that long-term conditions are favorable for continued demand for our products and services.
Uncertain general economic conditions, tightened credit markets, continued reduction in the Gulf of Mexico active
rigs, and rising steel and machinery pricing and availability constraints lead to some uncertainty about short-term demand and margins. This will require that we continue to be responsive to a changing market place and navigate
through these challenges.

“We continue to add backlog in vessel construction and our repair business volume continues at levels similar to the
past two years. Bid activity continues to be very strong but we are seeing pressure on selling price as well as
continuing increases in costs of material, labor and other operating expenses which could lead to lower profit
margins.

“Although we are uncertain about our shorter-term business outlook, we see potential opportunities that could require
that we invest additional capital to further develop our existing facilities to enable us to be more competitive in a
changing market. Having survived very difficult market conditions between 2002 and 2004 and after leveraging our
balance sheet to increase capacity to take advantage of market opportunities, we are cautious about adding additional
debt. “

I went to check out cnrd, and it says not valid because it is now cnrd.pk the stock is at 12.00 per share, and somehow got dropped to the pk sheets. Can someone explain this to me? Seems like you guys like the stock, but why? Plus no dividend.

As far as I know it has always been on the pink sheets — it might have been dropped at some point, I didn’t dig back far enough to be sure. I am interested in this one, but I’m not sure that there aren’t any scary skeletons in the closet. There are plenty of legitimate, small businesses on the pink sheets that just don’t want the hassle and expense of listing on the exchanges, so that’s not reason enough for me not to like them even if it does mean you need to do some additional research.

comment from a buddy of mine re. the Conrad article: Yup….. you’re right on man! Conrad (CNRD.PK) it is. At first glance, this thing looked so sweet, I figured we could put together a buy out and pocket the earnings, ha, ha. Looking a little deeper though, it’s clear this is a classic, pissy company who’s sole and primary goal is to keep the Conrad’s in the gravy, boats, airplanes and hunting club memberships and the stockholder get shit. You remember NBR and Parker, right. Appears to be much the same story here. 60 year old Louisiana run buy a… Read more »

Certainly sounds possible, Jay, thanks. It is pretty clear that the lion’s share of their business in the last couple years continues to be Katrina related to at least some degree, though they continue to have a strong backlog. I don’t know anything about the family or their record as stewards, certainly worth looking at.

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